Credit Cards 101

Know what you're getting into when you swipe that little piece of plastic.

Ideal Number and Types of Cards

Q. I’m tempted to open a lot of store cards around the holidays to take advantage of discounts. Will that affect my credit score? A. Yes: Every new application results in a credit-report inquiry. Each inquiry typically causes your score to drop by up to five points. And the lower your score, the less attractive you become to lenders when you apply for credit, a loan, or a mortgage. (Your score will rebound if your bill-paying record is good and you don’t apply for more cards.) Be choosy about opening new cards. Consider how much the holiday discount will save and whether you’ll be able to pay the bill in full. Store cards typically charge higher interest rates (sometimes more than 20 percent), so carrying a balance can eat up any initial savings.

Q. How many credit cards are too many? And is there such a thing as too few? A. Many experts recommend having no more than three or four cards. “When people have too many, they tend not to keep track,” says Howard Dvorkin, the founder of Consolidated Credit Counseling Services and the author of Credit Hell: How to Dig Out of Debt (Wiley, $20, amazon.com). Having too many cards can also make you look credit-hungry, which could hurt you if you apply for credit you really need.

Since no card is accepted universally, you’ll want one or two of the major cards, plus a charge-only card (the balance must always be paid in full) and a store card if you shop somewhere regularly.

Rewards Cards, Balance Distribution

Q. What should I consider when weighing a card with mileage points or other incentives against another card? A. People love the thought of racking up points, but the points are worthless if you don’t use them. Before signing up for a rewards card, check the limits of the program. Some restrict the stores where you can shop and receive points; others cap the number of points you can accumulate. Look at the interest rate, too, since rewards cards often carry higher rates and, occasionally, fees.

Your best bet is to keep a rewards card for smaller, everyday purchases that you’ll pay off in full each month and a low-interest card in case you need to carry a balance.

Q. Is it better to keep a big balance on one card or spread the balances over several cards? A. You’re usually better off keeping smaller balances on a few cards. “If you have just one card and it’s almost maxed out, that suggests (to your bank and other potential lenders) that you’re having trouble getting credit,” says Robert D. Manning, Ph.D., director of the Center for Consumer Financial Services, at the Rochester Institute of Technology, in New York.

The exception? If one card has a particularly low interest rate, you might want to switch all your balances to that one to save money.

Dealing With Unused Cards and Late Fees

Q. What should I do with cards that I don’t use? Should I leave them open or close them? A. Close the account and destroy the card. That’s the safest way to avoid fraud and identity theft. But first there are factors to weigh.

Best case: You should be using no more than half your available credit at any time, because your debt-to–available credit ratio accounts for about 30 percent of your credit score. If this ratio would be affected, you may be better off keeping the account open until you’ve paid off your debt.

A lengthy credit history also bolsters your credit score, so if you decide to purge some cards, “cancel in order of the newest card first,” advises Robert D. Manning, Ph.D., director of the Center for Consumer Financial Services, at the Rochester Institute of Technology, in New York.

Q. I may be late with a credit-card payment. What should I do? A. Call your bank―it might waive a late fee for a good customer. If you have a day or so before the payment is due, pay by phone or even overnight the check. That’s “usually cheaper than the late fee,” says Ellen Cannon, editor of bankrate.com, which offers financial-rate data.

The best strategy: Pay your bill on time, in full―even if your bank doesn’t like it. “In the industry, people who don’t carry a balance are called deadbeats,” says Cannon, “because they’ll never make money on you.” A smart way (for you) to do business.

Finance Charges, APRs, and Daily Rates

Q. I’ve paid off my balance. Why do I still see finance charges on my statement? A. Some banks charge “trailing interest,” which accrues from the time your statement period ends until your payment is received. To avoid paying it, you need to clear your balance within 20 to 30 days (the standard grace period) of posting the charge. Yes, that means paying off the bill before you get it. (Ask your bank for a payoff amount and date.)

Another bank trick to watch out for: double-cycle billing. Here, a bank charges interest over two cycles (say, 60 days, not 30) instead of one. So even if you’ve paid off most of a bill, interest is calculated on the original, full amount for a longer span.

Q. My statement lists an APR and a daily rate. What’s the difference? A. The APR is the annual percentage rate―the interest rate you’ll pay for the year if you carry over a balance. “All other period rates are based on the APR,” explains Scott Bilker, creator of DebtSmart.com, a website that helps consumers manage credit-card debt. “The daily rate is the APR divided by 365. The monthly rate is the APR divided by 12.” So by showing the daily and annual percentage rates, the bank is just doing the math for you.

Credit Agreements Terms, Balance Transfers

Q. Can my credit-card issuer change the terms of the credit agreement without my permission? A. Yes, a card issuer can change credit terms anytime―an important point that’s probably in the fine print of your original credit agreement. The bank must notify you at least 15 days before the change takes effect. Unfortunately, the message usually arrives in an easily overlooked mailer, and continuing to use the card is an acceptance of the new terms.

If you’re not happy with the new terms, you have the option of closing the account, and some banks will then let you pay your balance under the old terms, says Joe Ridout, a spokesperson for Consumer Action, a nonprofit education and advocacy group.

Q. How often can I transfer balances? Is it bad to transfer to a new 0 percent card every time I get an offer? A. You can move your debt around as much as you like. And that certainly seems smart if it means you’ll pay off debt quicker because no interest is accumulating. But always read the terms carefully so you know what you’re getting―which may be (after an initial-offer period) a higher interest rate. Be sure, also, that there are no costly fees. And don’t forget that when you apply for a new card, the resulting credit-report inquiry may drop your score.

Automatic Credit Limit Increases

Q. The bank increased my credit limit automatically. Is there any reason I should say no? Is it bad to ask the bank to increase my credit limit? A. It’s usually not a bad idea to accept (or ask for) an increase. When you’re applying for new credit, lending institutions like you to have low credit usage―the total amount you’ve charged to your cards compared with your total available credit. Take a pass on an increase, though, if you need to reduce your credit limits, says Scott Bilker of DebtSmart.com: “For example, you’re applying for a mortgage and the bank says you have too much available credit.” Banks want to feel sure that you’ll be able to repay a loan. Too much available credit might be an invitation to max out your cards.